When it comes to the concept of insurance, there are some technicalities which you should understand. These technicalities dictate the terms and conditions of the policy. Until and unless you understand the terms of the policy, understanding the policy benefits might prove to be a challenge. Take for instance the concepts of sum assured and sum insured. Both these terms determine the coverage level of an insurance policy and so you might believe them to be interchangeable. But are they interchangeable?
No, they are not. Sum insured and sum assured are two different concepts which are used in different types of insurance policies. Let’s understand sum insured and sum assured meaning and differences –
What is sum assured?
Sum assured in insurance represents the coverage of a life insurance policy. This is the benefit which is paid in case of death or maturity of the plan.
What is sum insured?
Sum insured, on the other hand, is the level of coverage under general insurance policies. This amount shows the maximum liability undertaken by the insurance company to compensate you in case of a covered eventuality.
Factors to consider when deciding sum assured
After knowing the sum assured meaning, knowledge of choosing the right sum assured is also important. So, when choosing the sum assured of your life insurance policy, here are some factors which you should consider –
Your financial responsibilities
If you have higher financial responsibilities, the sum assured of your life insurance policy should be high so that it can fulfil such responsibilities. So, when choosing the sum assured, understand your financial needs.
Number of dependents
If your family depends on you for their financial needs, you need a high sum assured so that in your absence their needs can be easily met by the insurance policy. The more the number of dependents that you have, the higher should be the sum assured.
Existing assets
If you have existing investments, the requirement of the sum assured reduces. Your investments also help in fulfilment of your financial goals and so you should consider them when picking the sum assured.
Existing liabilities
You should have a sufficient coverage in your life insurance plan if you have liabilities to pay off. The higher the liabilities, the higher should be the sum assured.
Age
When you are young, your human live value is more because you are expected to work longer and earn a high amount of income during your lifetime. So, when choosing sum assured, opt for a high amount if you are young.
Affordability
A high sum assured in insurance leads to a high premium. So, you should ensure that the sum assured of the policy is optimal enough to cover your financial responsibilities and affordable enough on your pockets.
Factors to consider when deciding the sum insured
When choosing the sum insured in a general insurance policy, the following factors should be considered –
The value of the asset being insured
If you are insuring an asset under the policy, the sum insured should be equal to the value of the asset so that in case of loss or damage, you get compensated for the actual loss suffered. For instance, if you are buying insurance for your car, the sum insured of the policy should be closest to the market value of your car so that you would be optimally compensated in case of claims.
The expected amount of loss
In case of health insurance plans, assessing the value of the asset is not possible since your health risks are insured. In such cases, you should ascertain the expected medical expenses which you would incur in an emergency. The sum insured should be sufficient enough to cover the expensive medical treatments and costs.
Number of members covered under the policy
If you are buying a family floater health plan, the sum insured should be sufficient enough to provide optimal coverage to every insured family member. So, in family floater plans, a high sum insured should be availed.
Inflation
Inflation increases the cost of goods and services and when choosing the sum insured, this inflationary trend should be kept in mind. The sum insured should be sufficient enough to cover the loss which has increased due to inflation.
Affordability
The sum insured directly impacts the premium of the life insurance policy. Thus, while a high sum insured is needed, you should ensure that the sum insured is also affordable on your pockets.
How sum assured affects premium amount
The sum assured has a direct impact on the amount of premium which you have to pay for your life insurance policy. If you opt for a high sum assured, the premium amount would also increase. Premium rates for life insurance plans, except unit linked plans, are expressed per INR 1000 of the sum assured. So, if the premium is INR 40 per INR 1000 sum assured, if you choose a sum assured of INR 1 lakh the premium would be INR 4,000 and if the sum assured is increased to INR 10 lakhs, the premium would become INR 40, 000. Moreover, under many plans, you can avail a premium discount if you choose a high level of sum assured. Thus, depending on the sum assured chosen, the premium discount is allowed.
In case of unit linked plans, however, the amount of premium that you pay determines the sum assured. The sum assured, in such plans, is expressed as a multiple of the premium amount. Usually, the multiple is expressed as 10 times the premium paid. So, if you pay an annual premium of INR 10, 000, the sum assured would become INR 1 lakh.
Thus, the sum assured and premium of a life insurance policy are interconnected.
How sum insured affects the premium amount?
Just like in life insurance plans, general insurance plan premiums are also directly impacted by the sum insured that you choose. The higher the sum insured, the higher is the premium charged. Moreover, there is no discount based on the level of the sum insured chosen in general insurance plans.
Thus, when you invest in a general insurance policy, know that the amount of sum insured that you choose would directly impact your premium. Be careful when choosing the sum insured and ensure that the sum insured that you have chosen covers you completely and also proves to be light on your pockets.
Top 3 differences between sum assured and sum insured
Now that you know what is sum assured and what is sum insured you should know how they differ from one another. The difference between sum insured and sum assured meaning can be analysed in the following table –
| Points of difference | Sum assured | Sum insured |
| Application | The term is used in life insurance policies | The term is used in general insurance policies |
| Nature | Sum assured in insurance represents a pre-determined benefit which is fixed. In case of death or maturity, a life insurance policy pays the promised sum assured irrespective of the loss suffered | Sum insured implies that the principle of indemnity would apply in case of a claim. The principle of indemnity pays the actual loss which the policyholder suffers. This loss might be lower than the sum insured of the plan |
| Relevance | The concept of sum assured in insurance becomes relevant because the economic value of human life cannot be measured. Thus, in case of death, the cost of loss of life cannot be ascertained. The policy, therefore, pays the coverage amount which the policyholder chose when buying the policy | General insurance policies are taken on assets or to cover financial loss suffered in certain events. The value of the asset or the extent of loss suffered can be easily ascertained. That is why general insurance policies follow the principle of indemnity and use the concept of sum insured. |
Illustration:
In a life insurance policy, if the cover is bought for INR 10 lakhs and the insured dies during the policy tenure, the death benefit would be INR 10 lakhs which is the sum assured of the policy.
In case of general insurance policies, say health insurance, let’s assume the coverage level to be INR 5 lakhs. When the insured is hospitalized, the medical bills amount to INR 3 lakhs. In this case, though the sum insured is INR 5 lakhs, the claim payable would only be limited to INR 3 lakhs which is the actual loss suffered. However, if the hospital bills amount to INR 6 lakhs, the claim would be INR 5 lakhs which is the maximum liability insured by the insurance company.
So, the concepts of sum insured and sum assured in insurance are different. Understand what is sum assured and what is sum insured and their relative differences so that you know what your insurance policy would pay in a claim.
Frequently Asked Questions
1. Why sum assured is less than total premium?
The sum assured represents the coverage amount and the premium represents the cost of insuring your mortality risk. The probability of death and/or maturity is what determines the premium and since this probability is a small number, the premium is always less than the sum assured.
2. What is minimum sum assured in term insurance?
The minimum amount of sum assured in term insurance plans varies across insurance companies and the term insurance plans that they offer. Some companies might offer a minimum sum assured starting from INR 25, 000 or INR 50, 000 while under some plans the minimum sum assured can start from INR 25 lakhs. So, the minimum value varies across plans and you should check your term plan to know the minimum available amount of sum assured.
3. How is maturity sum assured calculated?
Under most plans the maturity sum assured is the sum assured which you choose when buying the policy. Some plans offer maturity sum assured depending on the amount of premium that you have paid and the policy tenure. Under unit linked plans, however, there is no concept of maturity sum assured. You get the available fund value when the plan matures.
